In times of economic distress, it’s tempting for state and local governments to turn to real estate as a stable tax base. After all, it’s pretty hard to pick up a home and move to another, lower tax region overnight. Plus, homeowners are generally more economically stable than the population as a whole, so the resulting tax revenue from a rate hike can be better estimated; making government budgeting a little easier.
But, state and local bureaucrats should be exceedingly careful about grasping for the low-hanging fruit in their district. Raising taxes on property owners can potentially hurt the local economy, which is bad for both private and public-sector interests.
1. Raising Taxes Always Hurts the “Little Guy”
The way our judicial and legislative systems are configured, having your voice heard requires money and influence. Whether it’s lobbying the legislature to pass or amend legislation that’s favorable to your interests, or creating barriers that protect your industry, it’s a pay-to-play system.
In every instance where taxes are raised, the wealthy and established members of the community will find ways to sidestep the tax burdens created. Unfortunately, small businesses and the poor do not have this luxury.
I spoke briefly with a representative from the Hurwitz. We discussed the challenges created by a system that limits access to those with money and influence. To paraphrase, they told me: “We see it every day. The people with the most money and influence are far more likely to win a case or successfully modify legislation. They have the money to stay in the game longer. You don’t have to be right, although it helps. If you can afford to outlast the other party, the odds are in your favor.”
2. High Property Taxes Discourage Housing Development and Hurt the Low-End Workforce that Start-Ups Need to Thrive
For a struggling startup, finding people willing to help make their dream a reality is a challenge. Thankfully, there are multiple websites where remote, on-demand contractors can be hired for individual projects. But a local store or warehouse can’t hire people online to telecommute. They require local individuals to staff their entry-level workforce.
Raising property taxes hits both landlords and tenants. The workforce that local startups rely on to staff their storefronts likely rent properly nearby. When property taxes go up, the landlords pass the cost onto the renter. The challenge with raising taxes is that the effects on tenants aren’t immediate. Where landlords are hit immediately in the pocketbook, the tenant gets hit later when the lease is renewed. This means the local economy is hurt twice in a drawn out process of frustration for all parties involved.
3. High Property Taxes Can Cause Foreclosure Spikes
For landlords and residents that own their own homes, the impact of a spike in property taxes can be enough to push them over the edge, into foreclosure status. As neighbors see their friends down the street lose their homes, with a foreclosure notice posted in the front-yard, economic confidence takes a nosedive. Consumers start spending less and the small businesses that rely on a strong economy suffer.
What’s really fascinating is that according a recent study, “…raising property taxes has an asymmetric effect on government tax income.” This means that in many cases raising property taxes may not lead to an increase in tax-revenue; the other factors negatively impacted can outweigh the gains.
4. Raising Taxes, Instead of Cutting Federal Spending, Hurts Small Business
In the midst of the Great Recession, there was a debate between conservative and liberal policymakers over the right action to take in righting the ship. In fact, the Republicans staged a walkout after demanding that cuts to government spending be made. What’s interesting is that there are benefits to small business when government spending is slashed.
The more services the government provides to its citizens, the less opportunity there is for start-ups and small businesses to innovate and provide those same services. A lean startup will be much more economically responsible than a bloated government program. Plus, a local provider of products and services employs people in the immediate community.
When property taxes are raised, alongside other revenue-generating measures, the services the government provides are increased or enhanced. This directly hurts the opportunities for small business.
It’s hard to overestimate the downsides of raising property taxes. It punishes the economically responsible, pushes some over the edge into foreclosure, and increases the amount of economic capacity that is sapped from the private-sector. Governments should think long and hard before choosing to raise property taxes; the results might not be net-positive.